In an update of its annual economic publication, Asian Development Outlook 2017, the Asian Development Bank (ADB) reviewed its prospects for developing Asia, including Pakistan.

Here we take a look at the ADB’s future prospects for Pakistan and its current standing within the South Asian region which comprises Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka

For 2017-18, the bank maintained projections for growth and inflation, but stated that the current account deficit is expected to exceed the earlier forecast again by a wide margin.

The report states: assuming better growth prospects in advanced and developing economies alike, a continued revival in world trade volumes, and continued improvement in the security and business environment, GDP growth is expected to accelerate to 5.5 per cent.

The main impetus for industry and services growth will be expanded infrastructure investments under the China-Pakistan Economic Corridor (CPEC), other energy investments, and government development expenditure. Agriculture should expand by trend rates.

The government needs to address fiscal and external sector vulnerabilities that have reappeared with the wider current account deficit, falling foreign exchange reserves, rising debt obligations, and consequently greater external financing needs. Possible loss of momentum for making policy decisions may hamper growth prospects.

A key challenge will be to finance Pakistan’s burgeoning trade deficit as remittance inflows, however substantial, continue to fall

Rising domestic demand fuelled by economic expansion is expected to stoke inflation in FY2018. However, the ADO 2017 projection for 4.8pc inflation could stand with continued central bank policy vigilance, a muted increase in global oil prices, and some expected easing of global food prices.

An 18pc increase in tax collection and larger non-tax revenues would boost total revenue to 17.2pc of GDP.

Development expenditures are forecast to reach 6.3pc of GDP after public sector development programme allocations increased by half in FY2017.

The federal budget for FY2018 assumes two-thirds of deficit financing will come from domestic bank and non-bank sources with no borrowing from the central bank.

Achieving such a large reduction in the general government budget deficit and this ambitious financing target appears to be very difficult, but a continued large deficit would again require very substantial foreign financing.

Further large government borrowing risks creating inflationary pressure; accordingly, the central bank needs to vigilantly shape monetary policy to emerging circumstances in FY2018.

A key challenge will be to finance Pakistan’s burgeoning trade deficit as remittance inflows, however substantial, continue to fall.

Better prospects for global growth and trade are expected to further the recent improvement in export performance, however weak, in FY2017. Exports are likely to take off, though, only with adequate and reliable power supply and other supporting infrastructure and policy.

Imports are expected to continue to increase as growth spurs domestic demand that domestic production cannot meet. July 2017 imports were, though eight per cent less than the peak in June, 50.9pc above a year earlier.

Petroleum accounted for a quarter of the increase, while imports doubled for power generation machinery and construction, much of it apparently related to the CPEC.

Worker remittances have shown some unexpected improvement, in the first two months of FY2018, increasing by 13.2pc from the same period in FY2017. If this rebound can be sustained for the rest of FY2018, it may ameliorate the projected deficit.

In any case, the authorities may need to consider a rapid currency depreciation at some point to rein in import growth, or increase foreign borrowing to finance the external gap, to prevent an undue weakening of foreign exchange reserves.

Over the medium term, increasing government and CPEC-related repayment obligations highlight the need to carefully manage external debt, the balance of payments, and their financing requirements, while instituting macroeconomic and structural policies to support economic stability and make Pakistan more competitive.

Published in Dawn, The Business and Finance Weekly, October 3rd, 2017